Sunday, July 11, 2010

As U.S. unemployment remains stubbornly, dangerously, high, calls mount for a manufacturing revival. Hence James Fallows, blogging today from Aspen, puts forward a critique of the U.S. economy by Bharat Balasubramanian an engineering executive from Daimler AG in Germany, linking income inequality in the U.S. with a dearth of good manufacturing jobs:

"I will state that there will be a polarization of society here in the United States. People who are using their brains are moving up. Then you have another part of society that is doing services. These services will not be paid well. But you would need services. You would need restaurants, you would need cooks, you would need drivers et cetera. You will be losing your middle class.

"This I would not see in the same fashion in Europe, because the manufacturing base there today can compete anywhere, anytime with China or India. Because their productivity and skill sets more than offset their higher costs. You don't see this everywhere, but it's Germany, it's France, it's Sweden, it's Austria, it's Switzerland.... So I feel Europe still will have a middle level of people. They also have people who are very rich, they also have people doing services. But there is a balance. I don't see the balance here in the US."

Also today, Joe Klein, grudgingly admitting that increased hiring on Wall Street is good news of sorts, indulges in a prescriptive wish:

I guess I'm an economic curmudgeon, but I'd be a lot happier if the headline was: Green Energy Hiring Boom or Auto Industry Rebounds Strongly. But what we may be looking at is a continuation of the disease that forced the bailout in the first place: a distorted economy, where too many of the profits come from making deals and too few come from making things.

Making deals, bad; making things, good: that reminds me of the late-80s complaints that while Japan's Ministry of International Trade and Industry focused Japanese resources on vital industries, U.S. government planners didn't distinguish between production of microchips and potato chips when distributing government largesse.

Doubtless, it's good policy for the U.S. government to stimulate/incent development of "industries of the future" such as alternative energy and biotech. Doubtless, the growth of such industries would stimulate some good, high-skilled manufacturing jobs -- for a while at least, though technological development tends over time to destroy manufacturing jobs rather than create them. And yes, the U.S. financial sector has grabbed a bloated share of profits and has been a brain drain from other occupations demanding intense mental labor.

Still, I doubt that rising income inequality in the U.S. can be traced to a failure to generate good manufacturing jobs. And I doubt that increasing the proportion of the U.S. labor force engaged in manufacturing is either a likely or desirable means restoring income growth, reducing income inequality, or raising job and life satisfaction levels in the U.S. In his 2010 book Rebound: Why America Will Emerge Stronger from the Financial Crisis, Stephen J. Rose shows that the steady shrinkage of the manufacturing sector over the past half century has on balance benefited U.S. workers.

Citing Census and Current Population Survey numbers, Rose points out that while the percentage of Americans in manufacturing jobs has shrunk dramatically, these jobs have been replaced mainly not by low-level service jobs but by managerial and skilled professional jobs. From 1960-2007, the percentage of U.S. workers in manufacturing/construction shrunk from 30.5% in 1960 to 18.4% in 2007, and in mining/agriculture from 6.3% to 1.6%. In the same period, the share in the office sector rose from 34% to 43%, and of those in high-skilled services (health, education, communication) from 9.7% to 18.4% (pp. 140-143).

Rose further notes that the rise in the proportion of high-wage high-skilled job corresponds to improvement in average education levels. In 1960, only half of workers had a high school diploma, almost 30% had some college, and 10% had a college degree. "Today, these numbers are completely reversed": only 10% lack a high school diploma, 60% have some postsecondary education, and 30% have at least a 4-year college degree.

It would appear that the single most important factor determining future prosperity growth in the U.S., relative and absolute, is the level of educational attainment. On that front, we don't appear to be doing too badly, though low graduation rates among those who enroll in college, tuition increases far in excess of inflation, and disproportionate spending on services (e.g., recreation) and administration as opposed to instruction are worrisome trends.

According to U.S. Census data, 30.6% of American adults 25-29 had completed four years of college or more in 2009. In 1989, the figure was 23.4%; in 1969, it was 16.0%. In five-year increments since 1969, the fastest growth was in the Clinton go-go years, 1994-1999, when the percentage jumped from 23.3 to 28.2; the second largest 5-year jump was from 1969 (16.0%) to 1974 (20.7%). Overall, notwithstanding various fluctuations, growth in the percentage of graduates has been pretty steady. The vast majority of income gains over the last 40 years have been concentrated among college graduates -- and, to a lesser extent, among the 30-odd percent of the population with "some college."

Do these numbers suggest that we should strive to improve the lot of the majority who do not complete 4-year college degrees by increasing manufacturing jobs? Richard Florida has a different idea. Writing in the Financial Times, Florida notes Labor Dept. projections to the effect that, of 15 million jobs to be created over the next decade, about 6.8 million will be "high skill, high wage work in the knowledge, professional and technical sectors" and some 7.1 million "will be much lower-paying, low-skill work in the routine service sector." His solution is not to change those percentages, but to change the terms of service:

The problem is that on average, service workers earn only half of what factory workers make – and only a third of what professional, technical and knowledge workers are paid. The key is to upgrade these jobs and turn them into adequate replacements for the higher-paying blue-collar jobs that have been destroyed.

It has happened before. Yet the blue-collar jobs we pine for were not always good jobs:
we made them good jobs. When my father came back from the second world war, his
poorly paid factory job had been transformed. He was able to buy a house, put his two
sons through college and participate fully in the American dream. Some of this was due
to the power of unions. Most of it was because of the enormous improvements in
productivity wrought by improved technologies and management techniques.

The same thing can and must happen in the service sector. It is starting already.
Companies such as Wegmans, Whole Foods, the Container Store, Best Buy and Zappos
already account for a fifth of the top 100 best places to work in America. A typical hourly
worker at the Container Store earns about $30,000 a year, not nearly as much as a GM
factory worker but about 50 per cent more than the average for hourly-wage retail
workers. Retail outlet Trader Joe’s mandates that full-time workers earn at least their
community’s median household income, while its “store captains” can make six-figure
salaries. These companies recognise that better conditions lead to better customer
experiences – and an improved bottom line.

A century ago the US government set up an Agriculture Extension Service, designed to
provide technical assistance to farmers. In our own day programmes such as the Malcolm
Baldridge Award for Quality and ISO certification initiatives help to spread ideas
throughout the manufacturing sector. Service jobs are the last frontier of inefficiency,
providing abundant low-hanging fruit for the innovation and productivity improvements
that can undergird higher wages. Yet they have no comparable assistance.

Like Atul Gawande's article looking forward to an efficiency revolution in health care delivery seeded by the Affordable Care Act, this argument is powerful not only because it appeals to our wishes and builds on current trends, but because of its basis in historical perspective (or, to be less generous, historical analogy). Florida reminds us that there was nothing inevitable about the role of manufacturing jobs in building a prosperous middle class, and that the rote assembly line jobs of the 1950s and 1960s were not inherently more valuable than, say, home health care service or Wegmans customer service today.

Florida doubtless focuses on improving the terms of service work in large part because his research suggests that wealthy societies report higher levels of individual happiness when lower percentages of the population work in manufacturing. Florida is apostle of the "creative class" -- those who work "in science and technology; arts, culture and design; media and entertainment; business and management; law; healthcare and education," whose values, recreational preferences and work product he presents as generally beneficial to society at large. A March 2010 working paper, "Socioeconomic Structures and Happiness," co-authored by Florida, Charlotta Mellander of Jonkoping International Business School and Peter J. Rentfrow of the University of Cambridge, correlates results of Gallup 2009 research on the self-reported happiness levels of individuals in 150 countries with economic and sociological data on employment, education levels, and values, including attitudes toward gays and lesbians and people of other races. In wealthy countries, the study finds a negative relationship between manufacturing employment and happiness:

Our central hypothesis is that higher levels of happiness or subjective well-being will be exhibited in societies that have made the transition to post-industrial economies - those where a smaller share of the workforce is engaged in blue-collar production work and a greater share is engaged in knowledge-based and creative work.

Across all countries, the correlation between share of the workforce in working class jobs and life satisfaction was negative and significant (-.32), but when low and high-income nations are analyzed separately, the relationship is small and non-significant among low income countries (.18) and large and negative among high income countries (-53). When we control for GDP per capita, the results reveal a significant negative relationship between life-satisfaction and manufacturing for high income countries remains (-.370).

Not surprisingly, Florida et al find that wealthy countries with large numbers of people in creative class occupations report higher levels of happiness:

As can be seen in Table 2, across all countries the correlation between life satisfaction and the creative class is quite strong, but when we analyze low- and high-income nations separately, only high income countries display a positive relationship between life satisfaction and creative jobs (.76).

Not all manufacturing jobs are created equal, of course -- and a German engineer at Daimler is likely to have a working familiarity with the most demanding and fulfilling types. And of course, correlation does not prove causality. Still, Florida's data and ideas are compelling. And one projection seems certain: over time, the percentage of people worldwide working in manufacturing can only shrink. The future is elsewhere.

UPDATE 7/13: Ryan Avent argues in more detail that our economic future does not lie primarily in manufacturing, and that the key to future prosperity is education that equips people to acquire new skills (without saddling them with crushing debt):

What is crucial then isn’t goods or services or manufacturing or retail. To a certain extent, it is about routine tasks versus non-routine tasks, as routine tasks are more vulnerable to elimination by technology. But as technology improves, “routine” encompasses ever more exotic activities. And to a certain extent it’s about tradeable versus non-tradeable activities, but America exports billions of dollars in services, and technology holds the potential to increase the range of sectors that can be “shipped” across borders.

What is really important is the level, supply, and transferability of skills. And it is here that we seem to have run into problems. We’re not producing enough skilled workers to keep up with the demand for skills, and we’re producing too many unskilled workers. Many of today’s jobs require a great deal of specialized knowledge, which takes a long time to acquire. This generates a lag between labor market demand and labor market supply. It also introduces new risks, since it’s dangerous to invest a long period of time in training for a job that might soon be eliminated. And it’s far from clear that current education and employment policies are at all up to the task of maintaining a labor force that’s both flexible and skilled.

About Me

I'm a freelance writer and media consultant with a lasting interest in how democracy works, how it malfunctions and self-corrects. Since fall 2013 I've focused increasingly on the unfolding drama of Affordable Care Act implementation and health reform more generally.
I have a Ph.D. in medieval English literature and a propensity to parse the rhetoric and logic of our political leaders as well as that of media pundits and scholars who jump into the national debate. I wrote a dissertation on the remarkably humane and subtle medieval English anchorite Julian of Norwich, a mystic nun whose knack of squaring circles and framing paradoxes reminds me a little of our current president. A sampling of that work (mind the google gaps) is here: http://bit.ly/OzwsrR